The Bank for International Settlements published a working paper arguing that outstanding volumes in FX swaps are a useful proxy for the FX hedging activity that accompanies advanced-economy investors’ cross-border bond portfolios, making FX swaps a barometer of risk-taking and global financial conditions. The paper links variations in hedging activity to US portfolio debt inflows and outflows and to relative yield-curve slopes, hedging costs and risk appetite. Using semi-annual BIS over-the-counter derivatives statistics from 1998 to 2024 and US Treasury International Capital data, the authors document growth in FX swaps and outright forwards to USD 75 trillion at end-2024, driven primarily by “other financial institutions” and concentrated in major advanced-economy currencies against the US dollar. The analysis highlights that OFIs mainly use short-tenor FX derivatives to hedge long-term bond positions. Panel regressions for EUR, JPY, GBP, CHF and CAD associate higher FX swap and forward notionals with a steeper US 10-year minus 3-month yield curve, and lower notionals with a steeper local yield curve, tighter US financial conditions and USD appreciation in USD terms. Instrumental-variable estimates using high-frequency monetary policy surprises around central bank announcements strengthen the role of yield-curve and risk shocks, pointing to bidirectional spillovers, including from non-US advanced-economy policy actions that flatten local curves and coincide with higher FX-hedged investment into US bonds.

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